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Issues Involved:
1. Whether the sum of Rs. 60,000 paid to Shri Mohan Lal Vyas represented a trading loss of the assessment year 1964-65. 2. The year in which the loss occurred and could be claimed by the assessee. 3. The nature of the loss: whether it was a capital loss or a trade loss. Detailed Analysis: Issue 1: Whether the sum of Rs. 60,000 paid to Shri Mohan Lal Vyas represented a trading loss of the assessment year 1964-65. The assessee, a partnership firm involved in the manufacture and sale of miniature bulbs, advanced Rs. 60,000 to Shri Mohan Lal Vyas between July 1961 and April 1962. The purpose of these advances was to procure a manufacturing license and a permit for the release of foreign exchange necessary for importing machinery for manufacturing fluorescent tubes. Although Vyas procured the manufacturing license, he failed to obtain the foreign exchange permit, resulting in the government's revocation of the manufacturing license. The assessee filed a suit against Vyas, which was decreed ex parte, but the decree was not executed due to Vyas's lack of assets. The amount was written off as a bad debt on April 30, 1963, and claimed as a deduction for the assessment year 1964-65. The Income Tax Officer (ITO) disallowed the claim, questioning the payment's authenticity, the purpose of the payment, and the lack of execution of the decree. The Appellate Tribunal eventually allowed the claim as a business loss under Section 28 of the I.T. Act, 1961, recognizing the loss as incidental to the assessee's business. Issue 2: The year in which the loss occurred and could be claimed by the assessee. The court had to determine the correct assessment year for claiming the loss. The assessee advanced the amounts in the previous year relevant to the assessment year 1963-64. The Tribunal found that Vyas was to perform his contractual obligations by January 15, 1962, and upon failure, return the amount. The manufacturing license was revoked on November 2, 1962, relevant to the assessment year 1964-65. The suit was filed in 1964, relevant to the assessment year 1965-66. The court ruled out the assessment year 1965-66, as the filing of the suit did not affect the accrual of liability. The court emphasized that under the mercantile system, liability accrues when it is legally incurred, not when it is actually paid. Thus, the loss was allowable in the assessment year 1963-64, when the default occurred and the contract became incapable of performance. Issue 3: The nature of the loss: whether it was a capital loss or a trade loss. The court noted that the question referred did not encompass the nature of the loss but assumed it was a trading loss. The court stated that it could not raise new questions not referred to it and could only resettle or reframe the questions to bring out the real issues. The court cited precedent, emphasizing that it could not question the Tribunal's fact-finding and had to proceed on the facts found by the Tribunal. Consequently, the nature of the loss was not examined further, and the court focused on the timing of the loss. Conclusion: The court concluded that the disputed claim was a trading loss allowable in the assessment year 1963-64, when the loss actually occurred. The court answered the question in the negative, in favor of the department and against the assessee, and awarded costs to the department assessed at Rs. 200.
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